Exxon Mobil is no longer the world's largest oil company

Wikipedia
PetroChina just surpassed Exxon Mobil to become the largest energy company in the world, on a market cap basis.

PetroChina was able to accomplish this despite Exxon's growth of 1.5 billion barrels of oil equivalent (BOE) in reserves. These new reserves are located at the Permian Basin in West Texas and the Kearl Oil Sands project in Canada.

PetroChina's primary operations are located in China. This may not seem like a major oil hub to the average investor, but China is actually the 5th largest oil producing country in the world.

Now the question becomes: can PetroChina retain its status as the world's largest energy company?

Business Plans: Exxon vs PetroChina

PetroChina's business plan consists of strengthening its role in China, while expanding its global operations, so it can become a multinational company with significant influence.

But PetroChina's growth will have to come from abroad, as its domestic potential is nearing its limits. Large resources of domestic natural gas have been discovered off the South China Sea, but China will face geopolitical disputes over ownership of those resources from Vietnam. Leaving aside the high-costs of extraction, the territorial dispute will likely keep oil and gas from the South China Sea on the sidelines for quite a while. As a result, if PetroChina is to grow, it will have to expand its global foot print.

Low oil prices, however, present a challenge. Petrochina is currently looking to swap its high-cost Canadian assets with other international companies, in order to restructure itself in a leaner fashion. For now, PetroChina has not signaled any interest in acquiring other companies, suggesting the state-owned firm is pursuing efficiency rather than growth.

ExxonMobil, on the other hand, has been rumored to be eyeing a major takeover of BP. While merely speculation at this point, ExxonMobil would regain its title as the largest energy company in the world if the deal did in fact move forward. Currently, BP is the 6th largest company in the world.

But for ExxonMobil to acquire BP, it would have to clear a lot of hurdles, the most significant of which, would be a blessing from anti-trust regulators. ExxonMobil would also have to convince the UK government to approve such a deal, an uphill task given the fact that the British government has already stated that it would oppose any takeover attempt of BP. Moreover, ExxonMobil would also have to assume BP's legal liabilities, which at this point, are unknown.

Even if BP is too big for ExxonMobil to swallow, the Texas-based oil major is almost certainly looking to capitalize off of the current bear market by making a major acquisition. After recently raising $8 billion dollars in fresh capital, ExxonMobil is well-armed should it choose to pull the trigger.

Meanwhile, ExxonMobil plans to rely on its shale fields in Texas, Oklahoma, and North Dakota as a means to fund larger projects overseas, including a conventional oilfield in Indonesia, deep water projects in Nigeria and Angola, and oil sand projects in Alberta.

Exxon Vs PetroChina: who has the edge?

Based on the forward guidance of both companies, ExxonMobil looks like the clear favorite to retake its previously held position as the world's largest energy company, on a market cap basis. An acquisition will help grow the company, while PetroChina's asset swaps are a cost cutting measure, and not a growth plan. But before jumping to any conclusions, we must also understand the geopolitical factors that may come into play.

In a low priced environment, ExxonMobil has the advantage due to its large refinery assets, which benefit from low oil prices. Meanwhile, PetroChina is primarily a producer. ExxonMobil also has a history of making large acquisitions during a downturn. Exxon bought Mobil in 1998, and in 2008, it purchased XTO energy.

On the other hand, if oil prices were to rise to the $100 level, I would have to favor PetroChina. With Chinese demand increasing by 4 percent on a year over year (YOY) basis, PetroChina would face pressure from the Chinese government to secure resources, in order to feed its population's large appetite for oil. In 2012 when oil prices were high, PetroChina bought a large Alberta oil sands project, and then later that year, it took a 49 percent stake in Encana. If higher oil prices return, China's interest in the Canadian oil sector will resurface, as these high cost Canadian projects become economic once again.

The last two wildcards relate to geopolitical outcomes in the U.S. and China, respectively. Currently, ExxonMobil is America's largest natural gas producer, and the extent to which the U.S. government clears the way for natural gas exports, ExxonMobil's gas business will benefit.

In China, there is a possibility that the three state owned energy companies undergo some sort of merger, under pressure from the central government. While far from certain, if two or more major Chinese firms merge to form a massive state-owned conglomerate, it would easily surpass ExxonMobil in terms of size.

In conclusion, ExxonMobil seems to have a better chance of retaking its crown as the world's largest energy company, but a lot of factors must be considered, and PetroChina is still an emerging company. The likelihood is that these companies will be battling for the title world's largest energy company for a long time.